Tuesday, June 16, 2015

Germans, Cash, and Debt

But, of course, their attitudes toward currency must owe something to
Germany’s tumultuous monetary history. During the Weimar-era
hyperinflation that peaked in 1923, prices rose roughly a trillion-fold,
as Germany attempted to pay its onerous war reparations with devalued
marks.

Wouldn't hyperinflation mean you would not want any cash at all, and would want to take on debt (as it's real burden would just be inflated away?)

This reminds me of stories I heard about US mortgages in the late 70s, with interest rates topping 15%. While it might sound like a great time to take on a mortgage (high interest rates mean low house prices, and when rates fall you can refinance down) in practice people tell me that no one took out mortgages so no one bought houses unless the owner offered financing.

If anyone knows the real reason for German preference for cash, and/or US mortgages in the 70s, please let me know in the comments.

Grexit and the potential consequence

First, the only way public debt, for all practical purposes, need be ‘paid back’ is via refinance.

Second, with the implied guarantee of the ECB’s ‘do what it takes’
policy, rates are down and market forces not applicable for those
members ‘in good standing’ and not at risk of losing that ECB support.

Third, Greece, and the entire euro zone, is in desperate need of
larger deficits/more public debt, either through tax reductions or
spending increases (that choice is political). So even if Greece ‘wins’
on all points currently being negotiated the economy still
deteriorates, just at a slower pace.

Fourth, if Greece attempts to go to drachma or any kind of ‘parallel
currency’, based on discussion I’ve heard and read, it will most likely
be a case of out of the frying pan and into the fire. The expertise
required to do it right is not evident at any level.

Some of Mosler's points would make more sense in the context of a currency sovereign, which Greece is not once it joined the EU. However, he is correct that fundamentally, Greece needs more deficit spending to put the real economic resources there to work, and Varoufakis is not asking for that. He just wants less deficit reduction.

Suppose Greece defaults, what will be the impact on broader markets?

In 1998, Russia defaulted on its rouble debt (it did not have to, it did) and the US stock market cratered. The US economy is actually not that exposed to Russia, but some hedge funds are, and they had to make margin calls when they wrote down capital in their Russia bond portfolio, and sold equities to do so. This drove down the price of equities, which in turn forced even more forced selling to cover margin calls. If a similar dynamic happens this time, it's a buyers market so be brave, step in, and load up.

However, if banks have built up positions in Greek debt, and they need to write down capital to cover the loss at any scale, then they will have less ability to lend. I don't know how debt constrained the US economy currently is, but less bank lending is deflationary by definition so this could have real economic consequences in the US.